FACEBOOKS MARK ZUCKERBERG IS HAVING A GREAT YEAR: NET WORTH UP FROM $24.7B TO $31.

6B BETWEEJN JAN 3 AND MAR 12, 2014 By V. Laxmanan, Sc. D.

Facebooks CEO Mark Zuckerberg is having a great year a truly great year by any measure. The dark and dismal days following the disastrous IPO launch in May 2012 are behind him. Even back then, a good friend and former Facebook employee said that Mark is NOT going to lose much sleep because of the billions he has lost. That, he is motivated more by work and spends most of his time in the office. Even after Facebooks valuation crossed the $1B mark, this friend said, Zuckerberg continued to live in a small crappy apartment and slept on a mattress on the floor; see Huffington Post article [1]. That was before he got married to his longtime girlfriend, Priscilla Chan, over the weekend, following the IPO launch on Friday May 18, 2012. The gloom and doom scenarios that followed the IPO also prompted my first articles on the analysis of Facebooks profits-revenues data [2, 3]. My conclusion back in May 2012, that Wall Street should back off and let Mark Zuckerberg do his thing, has been more than justified. An update on the Facebook profits-revenues analysis is provided here in Appendix I.

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Email address: vlaxmanan@hotmail.com The author is a retired research professional, with advanced degrees in Mechanical Engineering and Materials Science and Engineering who has spent his entire professional career in leading US research institutions, in academia ( MIT and CWRU), in government (NASA), and in corporate research labs (Allied Chemical Corporate R & D, now part of Honeywell, and the General Motors Research Labs). He has also published many widely cited scientific articles in leading peer-reviewed international journals in both physics and the materials sciences. His current research interests include the study of business, financial, and economic data using methods commonly used in physics and the hard sciences. This has led him to propose a broad generalization of the Planck-Einstein ideas from quantum physics and their application to financial, economic, business, social, and political, sports and other systems. He has also recently been active in the analysis of the Page 1 of 10

climate data, especially global average temperature data using similar methods (a new physics of global warming) and as recently created a Facebook group called Global Warming for the Layman; see https://www.facebook.com/groups/GWforlayman/, on January 5, 2014, aimed at discussing global warming data in an easy-to-understand manner, with short posts; see also https://www.facebook.com/groups/physicseconomicsandrealworld/

The market has also rewarded Facebook, with increasing share price values, closing at $70.88 on March 12, 204, a jump of 28% for the year, compared to only a 1% increase for the S&P 500; see Ref. [4]. Zuckerbergs personal fortune has grown from $24.7B on January 3, 2014 to $31.6B as of March 12, 2014 (the date of this writing). He is ranked No. 19 today in the daily Bloomberg Billionaires Index; see also the analysis in Ref. [5].
34.0

Net worth, U [$, billions]

32.0 30.0 28.0 26.0 24.0 22.0 0

y = 0.1115x + 24.061 R = 0.8834

Zuckerberg Jan 3 to Mar 12, 2014 Slope h = $0.11B per day

10 20 30 40 50 60 70 80 90

Time t [Day number in 2014]

Figure 1: The daily net worth data for Zuckerberg obtained from Bloomberg Billionaires Index, from January 3, 2014 to March 12, 2014. A statistical analysis of the daily net worth data (linear regression, least squares method) indicates that Zuckerbergs net worth is now increasing at the rate of $0.11 B per day, see Figure 1. If this is sustained, he can be within

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striking distance of the top 5 billionaires by the end of the year, with a net worth in the range of $50B to $60B; see additional details in Ref. [5]. Daily Net Worth Data for Mark Zuckerberg from Bloomberg Billionaires Day Number Jan 2014
3 6 8 10 13 16 18 21 23 25 28 30 31

Net Worth $B

Day Number Feb 2014

34 36 39 43 46 49 52 55 57 59

Net Worth $B

Day Number Mar 2014

60 62 64 67 69 70 71

Net Worth $B

24.7 25.8 26.2 26.1 25.2 25.8 25.4 26.3 25.5 24.6 24.9 27.4 28.1

27.6 27.9 28.8 28.9 30 30.1 30.6 31.6 30.9 30.6

30.6 30.1 31.9 31.1 32.1 31.3 31.6

Day 1 is January 1, day 32 is Feb 1, day 60 is Mar 1 (not a leap year), and so on. Thru, Mar 12, 2014

Data source: http://www.bloomberg.com/billionaires/2014-02-26/cya

Image of Bloomberg Visual Data (Daily net worth for Billionaires). Notice slider with forward and backward arrows. Moving this slider allows one to get the net worth value for any date. The slider was set for February 26, 2014 in the above image, when Zuckerberg held rank 20 and net worth was $30.9 Billion.
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Appendix I Facebooks Profits-Revenues Performance

Consider a company making and selling N units of a single product. The revenues generated by the sales R = pN where p is the unit price. There is a fixed cost a and a variable cost bN associated with the operation. Here b is the unit variable cost. Hence, the total cost C = a + bN and profits P = R C = pN a bN = (p b)N a. Now, eliminating N, using N = R/p yields the following relation between profits and revenues, P = [(p b)/p] R a ..(1)

Equation 1 is a linear equation of the type y = hx + c, where x is revenues and y is profits and the nonzero intercept c = - a is related to the fixed costs of the operation. The simple analysis here reveals that the profits-revenues graph will be a straight line with a slope h = 1 (b/p) which depends on the un Slope h = (p b)/p = 1 (b/p) Intercept c = - a ..(2) ..(3)

The breakeven, or the cut-off, revenue for profitability of the company is obtained by setting P = 0, which gives Breakeven, or cut-off, revenue R0 = -c/h = ap/(p = b) ..(4)

Equations 1 to 4 above provide a simple theoretical model for assessing the performance of any company. Of course, real companies are much more complex and we must deal with many product streams, each having its own fundamental triplet (a, b, p). Lets test these ideas now with Facebook. The Profits-Revenues data for Facebook Year
2009 2010 2011

Revenues, x
777 1974 3711

Profits, y
122 372 668

Year
2012 2013

Revenues, x
5089 7872

Profits, y
32 1491

Profits is same as the GAAP Net Income in the annual financial statements.

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1800

Profits P [$, millions]

1600 1400 1200 1000 800

Facebook (2009-2013)

600
400 200 0 0 2000 4000 6000 8000 10000

Revenues, R [$, millions]

Figure A1: The profits-revenues data for Facebook, obtained the Annual Reports obey the linear law predicted by the breakeven model for a simple company making and selling one single product. (Some companies actually do this and are called on-trick ponies.) The equation of the line y = 0.193x 27.92 is determined using the two extreme points. Notice that all points fall on a straight line. The (x, y) pair for 2012 is an exception (the work function changed) but the revenues increased again in 2013, profits returned to the same operating line established in 2009 to 2011. The ratio y/x = 0.193 (27.92/x) is the familiar profit margin and increases as the revenues x increase and will reach the maximum value of b = 0.193 (or 19.3%) the slope of the line when revenues become very large. A one-time increase in the fixed cost explains the horizontal shift observed in 2012, when Facebook reported a very small profit. Notice that the ratio y/x, the ratio of marginal increase in profits y to the marginal increase in revenues x is a constant, not the ratio y/x which is a function of the revenues. This has NOT yet been appreciated by either economists or financial analysts, although the concept of marginal tax rate is well known. The constant slope seen here is like the marginal tax rate which is constant between different income brackets and the tax owed y increases by the same fixed amount for the same increase in the taxable income x.

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Cumulative Profits P [$, millions]

2000 1800 1600 1400 1200 1000 800 600 400 200 0 0

Facebook (2013) Cumulative quarterly

2000

4000

6000

8000

10000

Cumulative Revenues, R [$, millions]

Figure A2: The evolution of the profits-revenues for Facebook in 2013, obtained from the quarterly financial statements. The 3 month, 6 month, 9 month and the year-end profits and revenues also follow a linear law, confirming the simple breakeven model for profitability. The constancy of the slope h = [1 (b/p)] can be correlated to the unit variable cost b and the unit price p. The nonzero intercept is related to the fixed cost a. More detailed financial models that explain the behavior of a more complex financial system like Facebooks operations is clearly needed but the results here are quite revealing and are worthy of attention. The Profits-Revenues data for Facebook for 2013 Qtr ending
31-Dec-13 30-Sep-13 30-Jun-13 31-Mar-13

Revenues, x
2585 2016 1813 1458

Profits, y
523 425 333 219

Cumulative x
7872 5286 3271 1458

Cumulative y
1500 977 552 219

Profits is same as the GAAP Net Income in the annual financial statements.

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Quarterly Profits P [$, millions]

700

600
500 400 300 200 100 0 0

Facebook (2013) Individual quarters

500

1000

1500

2000

2500

3000

Quarterly Revenues R [$, millions]

Figure A3: The individual, quarter-to-quarter variation in revenues also reveal same pattern for the quarter-to-quarter increase in the profits. The seasonal nature of revenues affects the profits but a simple linear law y = hx + c describes the profits-revenues relation for Facebook in 2013. I have studied the profits and revenues data (and related financial metrics) for literally hundreds of companies, over the last 15+ years. I first got interested in this topic in 1998, as a researcher at the GM Research Labs. The UAW-GM strike that summer brought all GM manufacturing operations to a grinding halt. GM was widely considered to be highly inefficient and thereby unprofitable. The financial and labor productivity data that appeared in all newspaper articles (no internet back then) suddenly perked my interest. So, during the strike, and the two-week summer shutdown, I started analyzing some of this data. Soon, I realized that automotive industry data reveals nonlinear behavior which could be modeled using y = mxne-ax, which is Wiens law which also led to Einsteins photoelectric law. The present article, and many others posted on the Internet since Facebook launched its IPO, are the culmination of those efforts. When I started posting articles on financial analysis, taking advantage of the modern internet publishing tools, the first company I analyzed was Facebook
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because of the pressure it felt from Wall Street to increase revenues post-IPO. My analysis clearly showed that Facebook was on the right path and my published statements show that I had urged financial analysts to just back off and let Mark Zuckerberg run the company. (I wish GM top brass had learned this back in the 1993 when Wall Street urged in a Fortune cover page article that GM be broken up into five companies to become profitable. GM did NOT become profitable following the Wall Street prescription, which it did follow. Instead, in June 2009, it was forced to file for bankruptcy. The profits-revenues graph for GM shows a maximum point and GM was operating past that maximum point for many years before being forced into bankruptcy. The mathematical equation from radiation physics, Wiens law, is the simplest model to describe this behavior. Other companies have also revealed a maximum point, Air Tran for example, which was forced into a merger with Southwest Airlines. Southwest also reveals a maximum point, as does Ford Motor Company. All these companies need to pay attention to this P-R graph and the maximum point. Even linear behavior can lead to baffling complexity. There are six possibilities with the linear law with (h > 0, c < 0), (h > 0, c > 0), (h < 0, c > 0), with both increasing and decreasing revenues. Companies do NOT follow the same path when revenues increase and when revenues decrease. The articles posted at scribd.com discuss this more detail and also illustrate how we can apply the idea of a work function to the financial and economic world. Finally, lets take a look at the quarterly Facebook results which include the years when it reported a loss to illustrate the usefulness of the idea of a work function, if coupled with the breakeven model for profitability.

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Quarterly Profits P [$, millions]

700 600 500 400 300

Facebook (Q2 11 to Q4 13)

200
100 0 -100 -200 -300 0 500 1000 1500 2000 2500 3000

Quarterly Revenues R [$, millions]

Figure A4: The quarterly profits and revenues data for Facebook from Q2 2011 to Q4 2013. For Q2 12, FB reported a loss of $157 million and for Q4 2012, when revenues were higher they reported a small profit of $64 million. The solid line joins these two points. The equation of the straight line is y = 0.551x 809.5 = 0.551(x 1468.9). In other words, breakeven point is achieved with revenues x = x0 = - c/h = 1468.9. This is the solid blue dot. Since FB has revenues of $1585 million in Q4 2012 the addition revenues were converted into profits at the rate given by the slope h since y = hx. All of the additional revenues will not turn into profits because of the variable costs, h = 1- (b/p) according to the breakeven model. Now, for Q4 2013, we find the profits and revenues have increased and fall just below this line. This means the work function has increased and this has depressed the profits slightly relative to this reference line. Likewise, for the earlier quarters, although revenues were lower and profits were lower, FB was operating on a parallel with a smaller negative value of the nonzero c. The profits were actually higher in those quarters relative to this reference line. It is also obvious that there are two sets of (x, y) pairs (Q2 13 and Q3 13) and (Q3 11 and Q4 11) that actually fall on lines that are roughly parallel to the reference line used here for the breakeven determination.
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REFERENCES [1] Huffington Post, Mark Zuckerberg Net Worth No Longer on Bloomberg Billionaires List After Facebook Slide, May 30, 2012 (IPO date Friday May 18, 2012). http://www.huffingtonpost.com/2012/05/30/markzuckerberg-net-worth-bloomberg_n_1555411.html Laxmanan, V., The Facebook Future, Published May 19, 2012 (the day after the FB IPO launch, on Friday May 18, 2012). http://www.scribd.com/doc/94103265/The-FaceBook-Future Laxmanan, V., The Future of Facebook, Nonlinear analysis of profitsrevenues data, Published May 21, 2012, http://www.scribd.com/doc/94325593/The-Future-of-Facebook-I Frier, Sarah, Facebooks Share Price Rally Leaves Analysts Racing to Catch Up, March 11, 2014, http://www.bloomberg.com/news/2014-0311/facebook-s-share-rally-leaves-analysts-racing-to-catch-up.html A jump of 28% in share prices this year (as of Mar 11, 2014) compared to 1% for the S&P 500 Index. Laxmanan, V., Is Facebooks Mark Zuckerberg Possessed with the Work Function Vodoo? Published March 12, 2014, http://www.scribd.com/doc/212006104/IS-FACEBOOK-S-MARKZUCKERBERG-POSSESSED-BY-THE-WORK-FUNCTION-VODOO

[2]

[3]

[4]

[5]

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